Tuesday, November 20, 2012

Turkey keeps policy rate, cuts short-term rates further

The central bank of Turkey kept its benchmark one-week repurchase rate steady at 5.75 percent but again narrowed its interest rate corridor and said it may narrow it further and even cut the policy rate if necessary for financial stability. The central bank also expects inflation to continue to fall. The Central Bank of the Republic of Turkey said it would cut its overnight lending rate by 50 basis points to 9.0 percent but keep the lending rate at 5.0 percent. The interest rate on borrowing facilities for primary dealers via repo transactions would be cut by 50 basis points to 8.5 percent. As last month, the central bank also reduced the lending rate on its late liquidity window by 50 basis points to 12.0 percent while the borrowing rate was retained at 0 percent. "If deemed necessary for financial stability, a measured cut may be considered in the policy rate and the overnight borrowing rate in the forthcoming period," the central bank said in a statement. The central bank also said year-end inflation is expected to be lower than the forecast in the October inflation report due to a decline in unprocessed food prices, and it would continue to monitor the effect on medium-term inflation from recent increases in administered and energy prices. In the October inflation report, the central bank cut its forecast for end-year inflation to 6.2 percent from 7.4 percent.

Turkey's inflation rate eased to an annual 7.8 percent in October, the lowest rate this year. The central bank targets inflation of 5 percent but said last month that it expected inflation to remain above its target for some time due to the hike in administered prices. The bank repeated its previous statement that domestic demand continues to follow a moderate pace while exports increased further despite the weakening global outlook.

"Overall aggregate demand conditions support disinflation and the current account deficit continues to decline gradually," the bank said, repeating last month's statement. Turkey's economy has continued to grow despite the global slowdown with second quarter Gross Domestic Product up 1.8 percent from the first quarter, for an annual growth rate of 3.2 percent. Turkey's central bank has kept its policy rate steady since August but continued to narrow the interest rate corridor which it varies daily. A recent upgrade of Turkey to investment grade by a ratings agency has kept the central bank focused on holding down the lira currency which face upward pressure if international investors turn their attention to Turkish assets amid low rates in most advanced economies.